BSP seen poised to raise borrowing rate in Q3

The Bangko Sentral ng Pilipinas (BSP) may raise its overnight borrowing rate—from the record-low level of 3.5 percent—this third quarter or the next despite some relief provided by the slower-than-expected increase in the June consumer price index, economists said.

It was reported on Friday that the country’s year-on-year inflation rate for June was at 4.4 percent compared to market consensus forecasts of 4.6 percent increase in the consumer price index (CPI).

In a commentary, Bank of the Philippine Islands lead economist Emilio Neri Jr. said the surprise deceleration of the inflation pace may lead the BSP to pause from hiking the special deposit rates on its July 31 policy meeting but may still adjust its overnight borrowing rate “to signal that it has begun its tightening cycle.”

But since headline inflation is still expected to continue rising through August and therefore stray further away from the upper-end of the monetary authorities’ target for 2015, Neri said the BSP may still hike both SDA and overnight borrowing rates on the Sept. 11 policy meeting.

“Tempered June CPI grants time for policymakers to tweak policy settings and prioritize excess liquidity risk and spillover into financial stability, if any. Peakish inflation (in) late third quarter of 2014 provides clarity to secular inflation as food inflation risk expires,” said Jun Trinidad, economist at Citi Philippines.

“We continue to expect an overnight rate hike of 25 basis points in the fourth quarter of 2014 as real interest rate concerns emanate amid tail-end of the liquidity tightening cycle,” Trinidad said.

Trinidad said this could only be the “calm CPI before the storm,” adding that inflation rate may still test the 5-percent level in the months ahead.

Trinh Nguyen, an economist at HSBC, said the BSP would likely increase its overnight borrowing rate by 25 basis points to 3.75 percent at its July 31 meeting and take the key policy rate to 4 percent by yearend.

“We believe the BSP will raise rates further, as inflationary pressures are still high and June’s deceleration is primarily led by the slowdown of housing prices,” Nguyen said.

Nguyen noted that food prices remained elevated, reflecting supply-side constraints while excess liquidity was another concern as indicated by the credit growth acceleration in May.

“The government will import more rice to mitigate supply shocks but food prices will remain high,” Nguyen said.

BPI’s Neri said the BSP would likely shelve any adjustments to the reserve requirement ratio and wait for the recent SDA hike to feed into the system more.

In its previous meetings, the BSP increased the SDA rate by 25 basis points to 2.25 percent and also increased the reserve requirement ratio by 2 percentage points to 20 percent.

On market implications, Neri said expectations of an immediate BSP rate hike may be tempered for now, which may keep the peso-dollar rate away from a strong appreciation trend below the 43.50 level.

Citi’s Trinidad said the peso’s appreciation over the past months along with easing second quarter inflation expectations, sustained monetary tightening and fiscal underspending in the second quarter probably contributed to restraining second round price effects and tempered inflation in June.